Magazine

The Bonehead Barker Report

December 30, 2001

The new year will be here in no time, and I'm curious to see what fresh financial mayhem it brings. Before that, though, it's only right to look over my shoulder to see what mayhem The Barker Portfolio has caused. To that end, I searched the archive for columns that by December were at least a year old and had been proved by time and events to be plainly wrong. With my regrets, here are the doozies:

-- Delphi Automotive Systems. One day, this spun-off General Motors (GM) parts maker will be a terrific stock. It has proved to be just the opposite since I pointed out its potential at $20 a share in June, 1999, (charts) and compounded the error a year later when I favored it over Visteon, Ford Motor's (F) spun-off parts maker. Visteon (VC) shares now idle near $14, about where they started; at $13, Delphi's seem to be stuck in reverse.

Delphi (DPH) has progressed on many fronts, notably by reducing its dependence on sales to former parent GM, which dropped to 68% of total revenue in 2001, from 78% in 1998. Its electronics have even made their way into the hyper-hyped Segway scooter. Yet Wall Street is impatient with Delphi's inability to generate much in the way of cash flow that is free of costs from a restructuring that seems only to go on and on.

-- Coach. Before this maker of classy leather goods and fashion accessories went public in October, 2000, I was deeply skeptical. "Coach (COH) is fully priced," I warned. "Bargain hunters must wait." Boy, was that wrong. Coach sold its first shares at $16, and that has proved to be the low. Coach peaked at $42.75 and has been trading lately near $35.

Coach has handily managed the two challenges--profit growth and debt service--that I focused on. First, despite sharp competition, it boosted sales by 12% and profits by 66% in the fiscal year ended June 30. Margins widened dramatically as Coach added new product lines and sold more abroad, particularly in Japan. Cash flow in the fiscal year surged 46%, which enabled Coach to pay off much of its debt while opening new stores and remodeling old ones. Even in this weak economy, CEO Lew Frankfort sees no reason why Coach won't keep growing its number of stores and profits. "Holiday season sales are strong," he told me. "Investors will be pleased."

-- Rockland Small Cap Growth. In the fall of 2000, after years of laggardly performance, small-cap stocks were outpacing large caps. I figured that momentum would continue at least through 2001. On that much, I was right. Yet I misjudged the risk in one of the two small-cap mutual funds I pointed readers toward. Rockland Small Cap Growth Fund lost 39% in the 14 months ended Nov. 30, while the average comparable fund lost 27%.

Manager Dick Gould trades his portfolio furiously, a strategy that worked great in the fund's first four years. But in the past year, it seemed only to hurt. Gould said he was fooled by market bounces. The bearish trend led to "an awful lot of fake [upside] breakouts," he told me. "It's easy to get whipped around if you're not careful, and I think we got whipped around."

-- Krispy Kreme Doughnuts. "Anyone paying $20.75 a share [adjusted for splits] for a stake in Krispy Kreme (KKD) will have only an insanity plea based on the Twinkie defense to rely on after it plunges," I wrote in October, 2000. Oh, do those words make me queasy today. By June, the stock had split twice, doubling in value; it's still near $40, up 92% since my column.

My mistakes? I did not count on the company beating analysts' earnings estimates by a penny each quarter as it kept expanding (latest outpost: Canada). I also underestimated investors' steady devotion to a stock that trades at multiples above its rate of earnings growth. Krispy Kreme shares command 65 times the Street's estimate of profit in the fiscal year ending January, 2003. Meantime, the Street sees profit growing just 38%. Go figure, I might say, but the figures would show only that I was wrong on the stock.

Now that I've had my serving of crow for the year, I'm ready for a dessert of humble pie. No, wait--better make that a Twinkie. By Robert Barker